NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Kimberly-Clark Corporation's (KMB) ratings as follows:
--Long-term Issuer Default Rating (IDR) at 'A';
--Short-term IDR at 'F1';
--$2 billion commercial paper (CP) program at 'F1';
--$200 million dealer remarketable securities at 'A'/'F1';
--$2 billion revolving credit facility at 'A';
--Senior unsecured notes and debentures at 'A'.
The Rating Outlook is Stable. Approximately $6.5 billion of senior unsecured notes, remarketable securities, debentures and commercial paper outstandings are affected by this action. The revolver is unutilized. Previously, KMB's commercial paper (CP) was issued by its fully guaranteed subsidiary, Kimberly-Clark Worldwide, Inc. This has been discontinued with CP issuances through the parent, KMB. Total consolidated debt of almost $7 billion encompasses the $6.5 billion mentioned above and certain unrated facilities such as IRB's and local subsidiary debt.
Net revenue declines at the upper end of the company's public guidance of 3% to 6% which includes KMB being able to obtain additional pricing to cover depreciating currencies as an offset to the anticipated 8% to 9% currency translation drag. However, price increases are likely to result in at least short term volume declines as growth slows in economies such as Russia. The Procter & Gamble Company experienced a slight decline in developing market volume as it priced to offset foreign exchange devaluation across several countries. Even in developed markets consumers have generally responded to price increases with volume declines as pantries are drawn down. Attaining KMB's public guidance for a 2%-3% increase in volumes is likely to be pressured.
EBITDA margins tick modestly below last year's 20.8% with less sales than expected over fixed costs. Based on Fitch's expectations for crude at $50/bbl in 2015 and $60/bbl in 2016, if currencies stabilize around current levels there is likely to be larger deflation that could further firm margins. However, Fitch has not factored the scenario into projections in order to be conservative.
The company has very strong financial flexibility and will continue to manage to strong credit protection measures within the current rating category.
KEY RATING DRIVERS
Scale, Leadership in Stable Sector:
KMB's scale, with over $19 billion in revenues, leading market shares in tissue-based personal care products, as well as strong liquidity, are key underpinnings to the rating. The firm is a global hygiene company with approximately 50% of net sales and 65% of operating profit (before Corporate & Other expenses) generated in North America. Its principal products such as Huggies diapers, Depends for adult incontinence and Andrex toilet paper occupy leading positions in most markets. Euromonitor International cited that the company's diaper/pant was the second leading brand in the U.S. with a 39% share in 2013.
Commitment to Rating Profile:
KMB's management is mindful of the company's corporate ratings and publicly states its commitment to operating within the 'A' category. Historically discretionary activities such as share repurchases have been scaled back when cash flows experience pressure or if fill-in acquisitions are required. The last instance was in 2009 when the company suspended share repurchases and increased the contribution to its pension plan by $716 million partially close the large funding gap that developed after the financial crisis of 2008.
Modest Leverage Cushion:
The company's leverage increased moderately to 1.7x from 1.5x as anticipated after Halyard's cash flows were removed after the spin-off. If margins or operating cash flow are weaker than expected, Fitch expects the company to scale back some of its discretionary activities or reduce debt to maintain leverage at or below 2x. KMB operates with leverage below 2x and should continue in this fashion. As long as the company maintains its current business momentum which includes solid levels of brand support and innovation, the company could add nearly $1 billion in pro forma debt at Dec. 31, 2014 with minimal rating implications
Intermittent Input Cost Pressures:
Commodities used in the manufacturing process, such as resin, pulp, and energy, experience periods of price volatility that can pressure margins. The near term commodity outlook is benign and likely to be modestly deflationary given the rapid decline in oil prices. However, longer-term, oil and other input costs will generally remain volatile and may resume their general upward march. KMB has addressed increased costs through ongoing and intermittent restructuring programs, pricing in some markets, and exiting low margin regions and product lines. The company has a long and successful track record of containing costs and has had solid organic growth rates in the 3% to 5% range. As a result, there have been sequential improvements in EBITDA margins to 20.8% in 2014 from 18.9% in 2011. A focus on costs and organic growth should moderate or limit the negative impact of future input cost spikes.
Sizeable Liquidity, Financial Flexibility:
At Dec. 31, 2014, Kimberly had very comfortable liquidity of $2.8 billion with almost $800 million in cash on hand and a $2 billion unutilized revolver maturing in June 2019. Most of the company's cash is normally held in international markets and may not all be available to reduce debt balances. Long-term debt maturities in the next two years are moderate at less than $600 million and are likely to be refinanced in order to maintain the current capital structure and leverage in the 1.5x to 2x range. In 2015, the $200 million dealer remarketable security, the $300 million 4.875% notes, and a $37 million IRB mature.
The company's strong financial flexibility stems from its ability to consistently generate approximately $3 billion in operating cash flow annually. Operating cash flow is likely to fall below the 3 year average of $3 billion to $2.5 to $3 billion in 2015 with pressure on margins and profits from a strong U.S. dollar but should revert to historical levels in 2016 and thereafter. Dividends and capex have a $2.3 billion run-rate and are the basics needed to re-invest in the company and meet shareholder expectations. Fitch notes that KMB has generated at least $2.3 billion in operating cash flow since 2002. FFO Interest coverage has likewise been healthy in the 10x range.
Future developments that may, individually or collectively, lead to an upgrade include:
The company has the flexibility to manage its credit metrics at stronger levels given stable cash flows. Committing to operating with leverage below 1.5x would support upward migration. However, the company appears comfortable with its current ratings and thus an upgrade does not appear likely.
Future developments that may potentially lead to a negative rating action include:
A change in financial strategy to operate with leverage above 2x, most likely through a large debt financed share repurchase program or a transformative acquisition, would be a negative driver. Such an event would be assessed upon its occurrence. Further, any impairment in the company's ability to consistently generate operating cash flow in the $2.5 billion to $3 billion range would be of concern. These situations arise due to meaningful market share losses or prolonged and significant increases in major commodities concurrent with an inability to fully pass on price increases.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 2014);
--'Fitch Revises Base Case Crude Price Deck to Match Stress Case for 2015' (January 2015).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage